Midway Games Creditors Settle Suit With Shareholder Mark Thomas

June 6 (Bloomberg) -- Midway Games Inc.’s main creditor committee settled a lawsuit with Mark E. Thomas over his purchase of an 87 percent equity interest in the company from Sumner Redstone prior to the video-game maker’s bankruptcy.

The committee agreed to allow an affiliate of Thomas to collect as much as $5 million ahead of other creditors, whose claims aren’t backed by collateral. Thomas and the affiliates had been seeking as much as $70 million.

The settlement allows Midway’s estate to avoid paying “substantial additional legal fees,” the committee said in court documents filed June 4.

In November, Redstone, then the controlling shareholder, sold his stake in the company and a $30 million secured loan and a $40 million unsecured loan to Thomas for $100,000, court papers show.

Midway filed for Chapter 11 bankruptcy in February, saying it was hurt by the transaction because it lost the ability to take advantage of valuable accumulated net operating losses and other tax assets. The company listed assets of $167.5 million and debt of $281 million as of Sept. 30, according to court documents filed in Wilmington, Delaware.

The creditor committee last month accused Thomas and Redstone, the chairman of CBS Corp. and Viacom Inc., and his National Amusements Inc. of fraudulent transfer and breach of fiduciary duty for selling the stock, according to court papers.

‘Committee Is Satisfied’

“The committee is satisfied with the settlement,” Linda Dakin-Grimm, an attorney for the creditors committee said in an interview yesterday. “We believe the result is an important first step in the ongoing effort to recover damages.”

The lawsuit will move forward against Redstone, his affiliated companies, and Midway’s Board of Directors.

Under the terms of the accord, in return for the $5 million secured claim, Thomas and his affiliates will release the company of all other claims, and they will be dropped from the lawsuit. The settlement represents a 93 percent reduction in Thomas’s claims, court papers show.

According to the settlement, Acquisition Holdings Subsidiary I LLC, an affiliate of Thomas, would collect the $5 million from the proceeds of the sale of Midway, maker of the “Mortal Kombat” game. The payment would be reduced by any money Midway paid to Thomas after the company filed bankruptcy, according to court records. The committee said Thomas may have been paid as much as $287,000 after Midway filed bankruptcy on Feb. 12.

‘Mortal Kombat’

Midway received approval from U.S. Bankruptcy Judge Kevin Gross this week to hold a June 29 auction for most of its assets. Warner Bros. Entertainment Inc., a unit of Time Warner Inc. and the lead bidder, offered $33 million for “substantially all” of the company’s U.S. assets, including the “Mortal Kombat’” franchise created in 1992 and development studios in Chicago and Seattle, court papers show.

The case is In re Midway Games Inc., 09-10465, U.S. Bankruptcy Court, District of Delaware (Wilmington).

To contact the reporter on this story: Michael Bathon in Wilmington at mbathon@bloomberg.net.

To contact the editor responsible for this story: David Rovella at drovella@bloomberg.net.